Why Are Wages Of Both Skilled and Unskilled Workers Lower in Poor Countries?

Naveen Srinivasan, Poorna Narayanan, Megana Prabha and Hariharasudhan Selvaraj
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Naveen Srinivasan: Madras School of Economics, Chennai, Tamil Nadu, India, 600025
Poorna Narayanan: Madras School of Economics, Chennai, Tamil Nadu, India, 600025
Megana Prabha: London School of Economics and Political Science, Houghton Street, London, WC2A 2AE, United Kingdom
Hariharasudhan Selvaraj: (corresponding author) Madras School of Economics, Chennai, Tamil Nadu, India, 600025

Working Papers from Madras School of Economics,Chennai,India

Abstract: We introduce credit constraints into a standard model of endogenous growth. In the presence of credit constraints, firms in poor countries face higher borrowing costs which in turn negatively affects capital accumulation and labor productivity in the final-goods producing sector. Furthermore, lower capital intensity of production makes R&D activity less profitable. As a result, both demand for skilled labor and return to skill are lower in poor countries. Domestic financial frictions may therefore be the key to understanding the persistent wage differentials in favor of rich countries and international migration patterns we observe.

Keywords: Skilled Wages; Migration; Credit Constraints; R&D; Endogenous Growth (search for similar items in EconPapers)
JEL-codes: D24 D42 F2 J23 J24 J62 O40 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2025-08
New Economics Papers: this item is included in nep-fdg, nep-gro and nep-lma
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